Week 6 #2 Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells so

Question

Week 6 #2

Make-Versus-Buy Decision Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity. A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of $31.50 per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing unused space. The current costs are as follows: Per Unit Direct labor                    200,000                  10.00 Direct materials                    247,000                  12.35 Variable manufacturing overhead                      60,000                    3.00 Fixed manufacturing overhead                    170,000                    8.50 Total manufacturing cost                    677,000                  33.85 INSTRUCTIONS: Prepare an incremental analysis for the decisions to make or buy the soccer goals. Show the cost of continuing to make and to buy the goals. Show the effect on net income if they buy. Should Sports Equipment Unlimited buy the goals?

Explanation / Answer

* In case of buy decision, Fixed cost will be elimated by 60% i-e 170000 * 40% will be incurred.

Considering the above, it seems that Sports Equipment should continue to make and sell soccer goals since cost of buy decision has an addiitonal outflow of $ 21000 , since total cost per unit of "make" is $ 33.85 , however totalcost per unit to" Buy" will be $34.90

Incremental Cost for M/s Sports Equipment Unlimited makes and sells soccer goals Make Buy Incremental Per Unit Annual Per Unit Annual Per Unit Annual Direct Labour 10 200000 Direct Material 12.35 247000 Variable Overheads 3 60000 Total Variable Cost 25.35 507000 31.5 630000 6.15 123000 Fixed Cost 8.5 170000 3.4 68000* -5.1 -102000 Total cost per unit 33.85 677000 34.9 698000 1.05 21000

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